Question

JetSuite, a private jet charter company, prepares the master budget by taking each division manager's estimate of revenues and costs for the coming period and entering the data into the budget without adjustment. At the end of the year, division managers are given a bonus if their actual division profit exceeds the budgeted profit.

Questions

What problems do you see with this system?

What are the dangers of using only business unit measures to evaluate the performance of business unit managers?

Recently you overheard a manager at JetSuite saying "If every division manager maximizes divisional income, we will maximize firm income. Therefore, divisional income is the best performance measure."

Comment on and discuss this statement.

Answer 1

ans 1) the problem in this sysytem is that the estimates are according to the division managers and are not based on past performance or any other relevant forecast. the other problem that can also seen in this case is that " only managers are given a bonus in case of excess profit ". there are many employees wonking under manager should also be taken into the picture .

ans 2)danger of uning onlybusiness unit measure are-: (1) Lack of alignment between measurements with strategy - a key challenge for companies is to determine which non-financial measures need to implement. (2) Validate the measurements - do not validate the model, which leads to measure many things, and most of them are irrelevant. (3) Set up the right goals and measures. (4) Wrong measurements - research indicates that 70% ofcompanies used metrics that have no statistical validity.

ans 3)

• Divisional Income: Division revenues minus division costs •Each company’s real estate revenue was considered and costs pertaining to real estate was subtracted from it so as to obtain the divisional income. •Just like investors use accounting income to assess a firm's performance, firms use a division’s income to assess divisional performance. •But divisional income is not the best measure for a divisional performance of a company because it doesn’t consider on the investment made on that particular segment of the company and uses only the operating income of that segment which causes a narrow focus.